Chicago startup growth leads to tight quarters downtown

Tight office space market especially prevalent in River North, according to CBRE

August 06, 2013|By Wailin Wong | Tribune reporter

Workers go over plans at a Loop construction site as reflections stream in from across the street in this 2008 file photo. (Scott Strazzante/ Chicago Tribune)

Growth in Chicago’s startup community has led to a very tight market for appropriate office space, particularly in the River North neighborhood, according to a new report by CBRE.

The analysis of what the real estate firm called the “technology submarket” sprung from internal discussions about the increasing number of local startups hunting for space, said David Egan, director of research and analysis. Many of these companies seemed to be alums of 1871, the collaborative hub for digital startups that opened last year in the Merchandise Mart. Built In Chicago, an online community for the tech sector, counts nearly 200 digital startups that launched locally in 2011 and 2012.

Egan said his group set out to determine whether “we really have hundreds of new companies growing in Chicago with real estate needs.”

CBRE counted 42 downtown Chicago office buildings with a startup tenant. The vacancy rate of this subset is a slim 6 percent, much tighter than the 14.9 percent rate for Class B downtown buildings and 13.9 percent for Class C. In 2010, the vacancy rate for the technology submarket was nearly 14 percent. Gross rents, which includes expenses, have risen sharply during in the last two years. CBRE said the average gross rent for this submarket was $26.07 per square foot in the second quarter, up 17.2 percent since 2010 “with further upside potential.”

CBRE’s analysis showed that most of the startup offices are clustered in River North, although tech firms have also established a presence in the West Loop and Fulton Market areas, along with North Michigan Avenue. Egan said Google’s plans to move its Chicago office to the Fulton Market Cold Storage building by early 2016 “provides a roadmap” for more tech companies to migrate westward, especially as supply dries up in River North.

“There’s going to be a force of gravity that will exist with Google,” Egan said.

CBRE’s report noted that landlords seeking to rent to startups must “carefully strike a balance between the best economic deal and meeting the needs of a growing company.” High-growth tech firms typically look for short-term leases of fewer than five years and want room to expand. River North lofts have been particularly hospitable to startups, not just because the neighborhood’s landlords are accustomed to tech companies’ needs, but because the spaces themselves are suited to the non-conventional office layouts that the firms prefer.

As the market continues to tighten in River North and its surrounding neighborhoods, “trying to get yourself on the right deal is harder than it looks” for many startups, Egan said.

He added that the market conditions indicate “the strength of what’s happening in the tech space in Chicago…This is not just a blip. This is real.”